The Gold Standard Did Not Prevent Price Inflation

By blogger Lord Keynes (who is cool)

It was once claimed by Murray Rothbard that deflation was the natural state of the economy: or, that is to say, what Rothbard imagined as the “natural state” in his anarcho-capitalist fantasy world.

Needless to say, anarcho-capitalism has never existed in the real world, so we really have no empirical evidence to support such an idea. If we turn to the real world, the most laissez faire economy ever seen in the US (relatively speaking) was certain periods during the gold standard era. Austrians are fixated on the 1873–1896 period because of the near continuous price deflation in that time, but the truth is that it was an historical aberration.

A look at the data on price inflation in the US shows that inflation regularly occurred in the late 18th and 19th centuries:

Year | Inflation Rate

1776 | 14.17%
1777 | 21.87%
1778 | 29.78%

1780 | 12.25%

1782 | 9.70%

1790 | 3.75%
1791 | 2.71%
1792 | 1.87%
1793 | 3.45%
1794 | 10.95%
1795 | 14.38%
1796 | 5.26%

1800 | 2.10%
1801 | 1.31%

1803 | 5.49%
1804 | 4.38%

1806 | 4.23%

1808 | 8.66%

1810 | 0.00%
1811 | 6.80%
1812 | 1.26%
1813 | 20.02%
1814 | 9.89%

1822 | 3.65%

1825 | 2.57%
1826 | 0.00%
1827 | 0.83%

1834 | 1.97%
1835 | 2.89%
1836 | 5.62%
1837 | 2.77%

1841 | 0.95%

1844 | 1.12%
1845 | 1.10%
1846 | 1.09%
1847 | 7.69%

1850 | 2.16%

1852 | 1.08%
1853 | 0.00%
1854 | 8.68%
1855 | 2.95%

1857 | 2.92%

1859 | 1.00%

1861 | 5.96%
1862 | 14.17%
1863 | 24.82%
1864 | 25.14%
1865 | 3.68%

1880 | 2.48%

1887 | 1.10%

1900 | 1.24%
1901 | 1.23%
1902 | 1.21%
1903 | 2.28%
1904 | 1.17%

1906 | 2.23%
1907 | 4.47%

1910 | 4.42%
1911 | 0.00%
1912 | 2.06%
1913 | 2.13%
1914 | 0.94%

http://www.measuringworth.com/calculators/inflation/result.php

If we ignore those periods of war such as the American War of Independence (1775–1783), the War of 1812 (or Anglo-American War from 1812–1815), and the Civil War (1861–1865), we still find many periods of price inflation, usually when booms were occurring (that is, expansions in the business cycle).

Even in the 19th-century, gold-standard era, booms were basically inflationary (outside of the historically aberrant 1873–1896 period). For example, the US had price inflation under the gold standard in the following booms: 1825, 1834–1837, 1844–1847, 1841, 1852–1855, 1857, 1859, 1880, and 1896–1914. In particular, there was a period of protracted price inflation in most Western nations from 1896–1914. And note that the United States had no central bank for most of this period.

It is interesting to compare the periods of deflation above with those periods when the US suffered recessions in the 19th century, on the basis of Davis’s list from real manufacturing output data:

US Recessions in the 19th Century
Years (Peak–Trough) | Recession Length (years)
1796–1798 | less than 1
1802–1803 | less than 1
1807–1808 | less than 2
1811–1812 |
1815–1816 |
1822–1823 |
1828–1829 |
1833–1834 |
1836–1837 | less than 1
1839–1840 | less than 3
1856–1858 |
1860–1861 |
1864–1865 | less than 2
1873–1875 | less than 3
1883–1885 | 1
1892–1894 |
1895–1896 |
1903–1904 |
1907–1908
(Davis 2006: 106).

Although there is not a perfect match, it nevertheless seems to me that many of these recessions were deflationary periods as well: this tends to confirm that, before the unusual period of deflation from 1873 to 1896, people tended to think of strong booms as inflationary and recessions as deflationary.

Thus when Irving Fisher wrote this in 1933, he had could have cited some considerable evidence in US history to support it:

“I had since 1909 been stressing the fact that deflation tended toward depression and inflation toward a boom.” (Fisher 1933: 350, n.).

And that is how many economists have come to see the nature of deflation too.

SOURCE
http://socialdemocracy21stcentury.blogspot.se/2012/10/the-gold-standard-did-not-prevent-price.html

BIBLIOGRAPHY
Davis, J. H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Fisher, Irving. 1933. “The Debt-Deflation Theory of Great Depressions”, Econometrica 1.4: 337–357.

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